British Land has revealed a 1.4% drop in its portfolio value over the course of the year and its chief executive has warned of continued uncertainty ahead.
Chris Grigg said in his outlook statement that he expected “more inflation and increasing pressure on disposable incomes” to be a factor but that he expected the company “to benefit from the resilience of our business, the quality of our portfolio and the strength of our finances”.
As well as seeing its portfolio valuation come down to £13.94bn, British Land’s EPRA NAV also edged down by 0.4%.
During the year to 31 March the company saw the largest drop in value in its retail portfolio (-1.8%), while offices were more resilient (-0.7%). Most of the drop in value was accounted for during the first half of last year. During the second half of the year its portfolio valuation rose by 1.6%.
Leasing activity totalled 1.7m sq ft and the overall portfolio is now 98% let.
The £575m sale of its 50% stake in the Leadenhall Building, EC3, commonly known as the Cheesegrater, to CC Land is yet to complete but is due to do so before the end of this month. CC Land is also buying the other half of the building from Oxford Properties.
British Land’s loan-to-value ratio currently sits at 29.9%, down from 32.1% a year ago, and this is expected to come down to 26.9% following the Leadenhall sale.
Shareholders saw diluted underlying earnings per share rise to 37.8p during the year, a 10.9% rise, and received 29.2p per share in dividend, a 3% rise.
Grigg said: “Looking forward, the picture is a mixed one. The Brexit process has begun but uncertainty will continue for some considerable time. Though the UK economy has performed well since the vote, we can expect more inflation and increasing pressure on disposable incomes. This will impact consumer behaviour and retailer profitability. London occupiers, particularly financial institutions, are making contingency plans but there is a wide range of possible outcomes here. Our conversations with occupiers tell us that a large majority continue to value London and believe in its place as a global centre, as we do.
“Although we are seeing businesses taking longer to commit and being more thorough in assessing options, we see polarisation of both occupier and investor demand accelerating with an increasing focus on the best quality space…
“In this uncertain environment, we expect to benefit from the resilience of our business, the quality of our portfolio and the strength of our finances. We also look forward with cautious optimism as we believe that we can generate incremental returns by allocating capital to development opportunities we have created, while keeping risk at an appropriate level and flexibility to respond to changes in our markets.”
Comment: Alan Carter, Stifel
For a company that sometimes fails to get its corporate message and ambitions across in a convincing manner, the text of the statement is comprehensive and rather well delivered, and reflects a reasonable balance to the challenges ahead with a bit of optimism but with a nod to possible waning consumer confidence and the risk of London office demand weakening. While current development capex is minimal and LTV low at sub-30% there is scope within the portfolio to commit to meaningful development activity, although the description of this as “development opportunities we have created” is a strange way of describing assets where the tenant has vacated at lease expiry.
Nonetheless, 100 Liverpool Street, EC2, is a very strong office location and this major scheme has a very high and valuable retail content; the latter ought to prelet like falling off a log and will probably cover more than 30% of the likely rental income. The “advanced negotiations” on the proposed redevelopment at 1 Triton Square, NW1, on the Euston estate bodes positively, and at 2 Finsbury Avenue, EC2, which UBS has vacated, short-term letting of 90% of the emptied space is again encouraging ahead of a “light touch” refurb, implying decent tenant demand for flexible, short-term business space.
The key point is that ,until we are told otherwise, it appears that British Land has a bit more (upside) optionality in development commitment/exposure than its peer, which reports tomorrow, and that potential commitment is well-located: unless the occupational market collapses (which is possible but so far not in evidence) this offers some equity creation prospects.
The only problem is if you step back and look at the underlying growth from either rental and capital values, then we are not looking at much, if anything, at all. The shares yield 4.4%, gearing is low, debt costs low, capex measured, portfolio fully let and all is fine with the world except rents are not rising in any detectable manner and cap rates are buoyed (again) by low bond yields and aggressive overseas buying, which is why I think the sale of the Cheesegrater was such a sensational deal for the company and exactly what it should have done, which makes Land Securities’ apparent desire to retain its 50% stake in the Walkie Talkie ever more puzzling to me.
We were top of the range in NAV terms for British Land last year; the fact we are forecasting just 7p of NAV growth next year rather says it all. The shares trade on a 25% discount and, with the decent dividend yield, look cheap, but there is minimal value being created either by the company or through property market movements, but it looks to me as though British Land has a bit more going for it than its peer, although the pulse is hardly racing.
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